The Productivity Commission says competition law should be overhauled and steps taken to encourage investment in information technology, to address the "underperformance" of the country's services sector.

The commission issued a draft report today containing 25 recommendations that it believed would boost the productivity of the services sector and prevent it becoming a drag on the export economy.

Services accounted for nearly three-quarters of the country's Gross Domestic Product (GDP) and, directly or indirectly, half of its exports, commissioner Murray Sherwin said. "The evidence very strongly points to the productivity performance of services being 'modest'," he said.

Sherwin forecast it would be the recommendation of a change to the legal test used to decide whether firms were abusing market power that would "make headlines". Intensity of competition was a "key driver" of productivity but was currently "on the light side", he said.

Instead of the current "counterfactual" test contained in the Commerce Act, which attempts to judge how firms accused of abusing power might have been expected to act if they did not have such market power, the law could be rewritten to place the emphasis on the actual effects of companies' actions, the commission recommended.

It had got to the stage where the Commerce Commission was reluctant to take possible breaches of the Commerce Act to court because it was "so hard to get done", Sherwin said.

The Commerce Commission, or the Business, Innovation and Employment Ministry, could also be given more powers to undertake "market studies" to check the level of competition in different industries, the draft report recommended.

But the bulk of the report addressed services' firms "relatively low and late" investment in technology, arguing that could be turned around by embracing the opportunities created by cloud computing.

"We spend about as much as other countries on ICT as a proportion of GDP, but aren't getting the benefits out of it," Sherwin said.

The Productivity Commission found no evidence the country's reliance on the Southern Cross cable to carry international communications was restricting productivity growth.

But it recommended the Government ditch guidelines it adopted in 2012 that discourage agencies from hosting information about New Zealanders overseas. Doing so would encourage both the public and the private sector to take advantage of the "economies of scale" created by overseas-based cloud computing services, it said.

Productivity Commission inquiry head Geoff Lewis said it had sought input from Xero, but the company had been too busy. Sherwin said there was still an opportunity for the domestic industry to provide more advice to the commission before it finalised its recommendations in April.

In other recommendations designed to stimulate competition and technology investment, the commission said the Telecommunications Forum, an industry body, should develop guidelines for a "low-cost, user-pays system" that would let people retain access to their email addresses when they changed provider.

The Tertiary Education Commission should develop one-year graduate diplomas in IT to help make up for a shortage in IT graduates, as well as one-year diplomas in business studies for IT graduates, the commission recommended.

The tertiary education system was struggling to turn out graduates with the mix of skills required by employers, Sherwin said. "It is either IT graduates who don't have business nouse, or business graduates who don't have IT nouse," he said.